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Arizona governor touts misleading narrative on Empowerment Scholarship Program

Arizona Governor Katie Hobbs released a memo to claim that Arizona’s Empowerment Scholarship Account represents “increased costs to taxpayers.”

The memo claimed: “New estimates indicate the ESA voucher program may cost taxpayers up to $943,795,600 annually, resulting in a potential $319,795,600 General Fund shortfall in FY 2024.”

These big, scary-sounding figures are likely to become a staple of choice opponents’ rhetoric as more states implement programs that allow large numbers of students to qualify for scholarships.

However, the claims are based on highly questionable assumptions. They also sidestep the role of local revenue in funding public schools, and thus omit the net savings that scholarships programs can yield for taxpayers. And they ignore the interaction between ESAs and other state policies that subsidize school choice.

The Hobbs memo makes two large mistakes in addition to some smaller ones: first, ignoring a preexisting choice program for private school students for purposes of cost estimates, and second, mistaking the interests of taxpayers with those of interest groups seeking money from the state, which are in fact entirely different things.

Arizona’s Empowerment Scholarship Accounts Saves Taxpayers Money

The Hobbs memo assumes that almost 100,000 students will sign up for ESAs, generating a frightening estimate of a $943.8 million cost. This number may seem daunting until placed into context: Arizona spent over $80.5 billion in fiscal year 2022. This means even the exaggerated ESA cost estimate (more on that below) represents approximately 1% of state expenditure.

Educating 8% of the state student population for approximately 1% of state expenditure constitutes a good deal for taxpayers. Put another way, if every student in the state was enrolled in the ESA program rather than in the current mix of district, charter and private school options, it would save taxpayers billions of dollars.

The estimate that nearly 100,000 students would sign up for ESAs, however, seems profoundly unlikely. ESA enrollment plateaued around the 60,000-student mark this summer. The enrollment period for most private schools lies months in the past.

Even taking this far-more-than-worst-case scenario at face value – 100,000 students at a cost of $943.8 million dollars – Arizona taxpayers still have nothing to fear.

For instance, state taxpayers provided the Mesa Unified School District $795.7 million dollars to educate 55,000 students last year. The more-than-worst-case scenario ESA program would, in other words, educate an additional 45,000 students for an additional cost of only $148 million – a fraction of what taxpayers would pay to educate those same students in a district school.

The logical slide employed here is to conflate the interests of those seeking state dollars with the interests of taxpayers paying local, state and federal taxes. A bit of background is necessary. Lobbyists lurk around state capitols everywhere seeking to access state dollars for their clients. Arizona, alas, is no exception. When it suits their purpose, these lobbyists like to pretend that local and federal revenue sources either don’t exist or else should not be considered. The Hobbs memo uses the term “increased costs to taxpayers,” but actually describes some (exaggerated) increased costs to state revenue. Given that Arizona taxpayers pay local, state and federal taxes, the ESA program is a bargain for taxpayers if it lowers the overall costs they must bear.

Take the case of a taxpayer in the Mesa Unified School District who pays their local, state, and federal taxes. The average per-pupil cost for a student attending Mesa Unified in 2022 was $14,381 drawing on a mix of state, local and federal sources.

If, instead, a student enrolls in the ESA program and receives a $7,200 scholarship funded solely by the state, an Arizona lobbyist would like to imagine that the taxpayer has reason to be upset because all of the $7,200 derives from funds collected by the state. In the imagination of Arizona’s lobbyist community, the taxpayer should feel up in arms because the $7,200 came from one pot of the taxes they pay, and utterly blasé about the $14,381 coming from all three of the types of taxes they pay. The reader can decide for themselves whether this assumption is either reasonable or plausible.

For example, district supporters have long complained about Arizona charter schools getting “more money” than district schools on a per-pupil basis, despite the fact that they get far less total public money per pupil because they do not receive local funding. Public dollars are all green, but some public dollars are greener than others in this bizarre but common point of view.

Illustrated pile of dollar bills in different colors
Advocates claim some public dollars are greener than others. (Image generated by DALL·E)

The oddity seems to be driven by a combination of self-interest and capitol groupthink. If you think that the average Mesa taxpayer is anxious to force students to attend a $14,381 per student district rather than families having the option of a $7,200 ESA out of their financial self-interest, I may have misunderstood things entirely. If the ESA program is reckless regarding the interests of taxpayers, how can we defend the existence of Mesa Unified, which costs far more to taxpayers while educating fewer students?

The Hobbs Memo Ignores the Financial Implications of Scholarship Tax Credits

The Hobbs memo states: “The passage of universal ESAs includes non-state aid district students, existing private school students, and homeschool students, all of which did not previously receive any State funding. This represents an estimated 40,400 students who would be funded fully through the General Fund under the updated projections.” Private school students in Arizona, however, were already receiving financial assistance indirectly from the scholarship tax credit programs and thus it is entirely inappropriate to score them as a new cost to the state.

Few Arizona school districts have so much local property wealth that they do not receive state aid. Despite a recent surge, fewer than 3% of Arizona students homeschool. The Arizona ESA program contains clear language separating ESA participation from homeschooling, so none of the recent surge in homeschooling derives from ESA use, and the surge in homeschooling happened despite the increase in ESA enrollment. Former homeschoolers can and have enrolled in the ESA program, but they constitute a modest source of increased ESA enrollment.

A large majority of the estimated 40,400 students Hobbs estimates are now fully funded by the General Fund were thus students already attending private schools. Here is where the first oversimplification of the Hobbs memo appears. It ignores the fact that nearly all private school students were receiving aid before the universal expansion of the ESA program.

Arizona lawmakers passed the nation’s first scholarship tax credit program in 1997. Under this program, taxpayers can make a donation to a private nonprofit group which provides scholarships for students to attend private schools. The taxpayer receives a dollar-for-dollar credit against their state tax liability in return for their donation. This original program has been expanded by the voters and by lawmakers, and three additional scholarship tax credit programs have been created in the following years. Two of the tax-credit programs have an income eligibility test and two do not. In total, these scholarship tax credit programs provided over 98,000 scholarships worth $218 million in Fiscal Year 2022.

Arizona’s Empowerment Scholarship Account program forbids students from concurrently receiving tax credit scholarships and an ESA. Parents have thus been choosing which program to participate in. Overall, the Arizona Department of Revenue reported that 37% of total scholarship tax credit funds went to low-income students, 34% to middle income students and 29% to higher income students. The scholarship tax credit programs reached students of all income levels while providing higher levels of subsidy on average to lower-income students. Based upon the number of scholarships given and the total number of private school students, it became clear years before the advent of the ESA program in 2011 that the vast majority of Arizona private school students received tax-credit aid.

The Hobbs memo, however, scores each ESA student previously attending private school as a new cost to the state without consideration of the tax-credit program subsidy. In fact, the memo scores each student enrolling in the ESA program as having the same impact on the General Fund as a student attending public school in a district that receives no state aid ($7,200). Non-state aid districts, however, by definition, received no state aid, whereas private school students received $218,000,000 in aid through the tax credit system.

In effect, the vast majority of private school students switched from one state-supported school choice program to another. A similar dynamic is at play when a student uses open enrollment to transfer from a non-state aid district to a state aid district, thus generating a net cost to the state. Likewise, when a student transfers from a district to a charter school, it entails a small increase in state funding for the student but an overall decline in total taxpayer spending once local school district funds are taken into account.

When a student leaves the tax credit program to enroll in the ESA program the amount of additional cost to the state general fund depends upon how much they previously received in tax credit aid. In the context of an $80.5 billion state budget, however these impacts are modest and can cancel each other out. Neither the Arizona Department of Revenue (which collects data on the tax credit program) nor the Arizona Department of Education (which administers the ESA program) collects data on the amount of scholarship tax credit revenue previously granted to a transferring ESA student. The Hobbs memo, however, effectively assumes a figure of zero.

We do not yet know what number of students will choose to utilize scholarship tax credit scholarships, and how many will enroll in the ESA program. The tax credit programs, however, show signs of decreasing as participation in the ESA program increases. The largest of the tax credit programs, for instance, has a statewide cap on the amount of donations allowed per year. While donors hit this cap on the opening day several years in a row, currently 40% of the cap for this program remains unused. We can further assume that donations to the individual tax credit program will decline to the extent that students transfer to ESA.

Future publications from the Arizona Department of Revenue will illuminate this subject over time. We will see what happens with the total tax credit revenue raised and dispersed through the scholarship tax credit programs. The scholarship organizations could find an important niche in Arizona’s school choice system by focusing on providing higher scholarships to low-income students generally and (especially) to low-income students attending high school, where costs tend to be higher.

Arizona’s budget is a complex system of moving parts and only a highly contrived set of circumstances would lead one to conclude that a single program will “cause” a budget deficit. As an example of the many moving parts constituting a state budget, Arizona had an estimated 670,000 “Covid override” participants in the Medicaid program. Congress ended what was known as “continuous eligibility” for Medicaid on April 1, and Arizona’s Medicaid program began its regular renewal process in February. The first discontinuations and disenrollments since the height of the pandemic carried obvious state budget implications: namely, a likely reduction in the number of Arizonans receiving taxpayer-funded health coverage. Similarly, total public school enrollment stands at 80,000 fewer students than estimated before the pandemic, which means taxpayers are funding the education of fewer children. The budgetary implications of the ESA program are modest in comparison.

The balance of Arizona’s budget will depend upon the amount of revenue collected and the amount of spending on all programs, not merely a program very likely to cost well below 1% of total state funding next year.

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BY Matthew Ladner

Matthew Ladner is executive editor of Next Steps. He has written numerous studies on school choice, charter schools and special education reform, and his articles have appeared in Education Next; the Catholic Education: A Journal of Inquiry and Practice; and the British Journal of Political Science. He is a graduate of the University of Texas at Austin and received a master's degree and a Ph.D. in political science from the University of Houston. He lives in Phoenix with his wife and three children.